Travelzoo

NASDAQ:TZOO

Earnings Call Analysis

Travelzoo's Q3 Results: Revenue Dip Offset by Increased Profitability

In Q3 2024, Travelzoo reported a slight revenue decline to $20.1 million, down 2% year-over-year. However, operating income rose 30%, reaching $4 million, with operating margins at 20%. The company anticipates robust growth in 2025 driven by new membership fees, converting 95% of legacy members into paying customers. In Q4, higher profitability is expected despite a slower revenue growth pace. With a solid cash position of $12.1 million, Travelzoo plans to continue share repurchases and expand marketing efforts to support membership growth, aiming for substantial growth in both membership and advertising revenues moving forward.

Q3 Performance Overview

In the third quarter of 2024, Travelzoo reported consolidated revenues of $20.1 million, a slight decline of 2% from the previous year, and effectively $20 million in constant currency terms. This fell short of the company's expectations, though operating income surged by 30% year-over-year, amounting to $4 million, or 20% of total revenue, compared to $3.1 million in the same quarter last year.

Segment Insights

The growth was predominantly driven by the European segments. Advertising revenue was the primary contributor, totaling $18.7 million, while membership fees generated $1.4 million. However, the latter remains a small portion of total revenue, with expectations to see significant increases starting in 2025 due to the introduction of a membership fee earlier this year.

Membership Fee Strategy

Travelzoo has implemented a membership fee that will begin applying to 'legacy members' from January 1, 2025. These members represented over 95% of the current membership base but are exempt from fees in 2024. The revenue from these fees will be recognized gradually over the subscription period, which aligns with their broader strategy to improve engagement and profitability.

Financial Stability and Future Prospects

The company maintained a solid cash position, reporting an operating cash flow of $5.3 million and a cash balance of $12.1 million by the end of September 2024. Looking ahead to the fourth quarter, Travelzoo anticipates year-over-year revenue growth, albeit at a reduced rate compared to 2023. Expected profitability should also rise on both a quarterly and annual basis.

Advertising Plans and Revenue Growth

The management expressed confidence in maintaining or growing its advertising revenues, cheerfully projecting an increase due to their strategy of maintaining advertiser reach even for non-paying members. Travelzoo's advertisers can still access offers, although early access will be reserved for paying members, which is expected to enhance member engagement and satisfaction.

Jack's Flight Club Update

Jack's Flight Club showed notable performance with revenues growing by 11% to $1.2 million, and a 14% rise in premium subscribers. Recent pricing and marketing strategies have begun to pay off, showing promise for sustained future growth as these initiatives translate into improved key performance indicators.

Travelzoo META and Future Innovations

The company is also venturing into new territories like the development of Travelzoo META, exploring metaverse travel experiences. This initiative showcases their commitment to innovation while affirming the need for financially disciplined growth strategies.

Management’s Outlook

Management remains optimistic about 2025, with multiple initiatives aimed at enhancing member value and creating new benefits for paid memberships. They successfully engaged with the customer base to understand their needs, reinforcing a positive sentiment towards the upcoming subscription model and its potential to facilitate superior travel experiences.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the Travelzoo Third Quarter 2024 Earnings Call. Today's conference is being recorded. [Operator Instructions] The company would like to remind you that all statements made during the conference call and presented in the slides that are not statements of historical facts constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in the company's Forms 10-K and 10-Q and other SEC filings.

Unless required by law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's website for important information, including the company's earnings press release issued earlier today. An archived recording of the conference call will be made available on the company's Investor Relations website at travelzoo.com/ir.

Now it is my pleasure to turn the call over to the floor over to Travelzoo's Global CEO, Holger Bartel, its General Counsel and Head of Global Functions and CEO of Jack's Flight Club, Christina Chaka, and its Finance Controller for North America, Jeff Hoffman.

Jeff will start with an overview.

[Unknown Executive]

Thank you, operator, and welcome to those of you joining us today. Please refer to the management presentation to follow along with our prepared remarks. The presentation in PDF format is available on our Investor Relations site at travelzoo.com/irr. Let's begin with Slide #4. Travelzoo's consolidated Q3 revenue was $20.1 million, down 2% from the prior year. In constant currencies, revenue was $20 million. This was a little below our expectations. Operating income, which we as a management call operating profit increased 30% year-over-year. Q3 operating profit was $4 million or 20% of revenue, up from $3.1 million in the prior year.

Slide 5 shows that higher profits came particularly from our Europe segment. On Slide 6, we break down our categories of revenue, Advertising, Membership Fees and other. Advertising revenue was $18.7 million for Q3 2024. Revenue from membership fees was $1.4 million. Membership fee revenue is still small. We expect to substantially drive revenue and profit growth in 2025 for the following reasons. At the beginning of 2024, we introduced a membership fee. Those who are already members at that time are [ exempt ] from the fee during 2024, but have to pay in 2025. We call this group legacy members, and they represent over 95% of current members.

Slide 7 shows an example of membership fee revenue recognition. Revenue from membership fees is recognized ratably over the period of the subscription. Member acquisition costs, however, are fully recorded and recognized as expenses immediately. On Slide 8, you can see that our GAAP operating income remained high at 28%, which is typically our slowest quarter of the year. Slide 9 shows that in North America, the GAAP operating margin remained high at 25% for Q3 2024. In Europe, the margin increased to 17%. On Slide 10, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo's management evaluates financial performance. Q3 2024 non-GAAP operating profit was $4.9 million, that's 25% of revenue compared to non-GAAP operating profit of $3.9 million in the prior period year.

Slide 11 provides information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to Slide 12. With operating cash flow of $5.3 million, we maintained a solid cash position even after purchasing 552,679 shares of the company's outstanding common stock during the quarter. As of September 30, 2024, consolidated cash, cash equivalents and restricted cash was $12.1 million. Going forward, we expect our cash balance to increase again as we collect membership fees at the beginning of the subscription period.

Slide 13 shows how revenues compared to operating expenses. Most of the company's operating expenses, except for marketing, are relatively fixed in the short to midterm. We believe we can keep our fixed costs relatively low in the foreseeable future. Higher revenues would thus increase operating margins. Looking ahead for Q4 2024, we expect growth in revenue year-over-year, albeit at a smaller pace than in 2023. However, there could be unexpected fluctuations. We also expect for Q4 2024 higher profitability year-over-year and quarter-over-quarter. For 2025, we expect substantial growth in revenue as a result of additional revenue from membership fees.

I'll now turn the discussion over to Holger.

[Holger Bartel, executive]

Thank you, Jeff. We will continue to leverage Travelzoo's global reach, trusted brands and our strong relationships with top travel suppliers to negotiate more club offers for our members. Travelzoo members are affluent, active and open to new experiences. We inspire members to travel to places they never imagine they could. Travelzoo is the must-have membership for those who love to travel as much as we do.

Slide 14 provides more information about Travelzoo members. 91% say that we are open to new destinations and travel ideas. We are the club for travel [indiscernible]. On Slide 16, we provide an overview of our management focus. We are working to convert a large number of legacy members into paying members from January 1, 2025, [indiscernible] new benefit to meet paid membership even more valuable, retain and grow our profitable advertising business from the popular top 20 products, utilize higher operating margins to increase EPS, project [indiscernible] clubs profitable subscription revenue and develop Travelzoo META with discipline.

I'm now handing over to Christina who will speak about [indiscernible] Travelzoo META.

[Arveena Ahluwalia, executive]

Thank you, Holger. In Q3, Jack's Flight Club had year-over-year increases in revenue of 11% to $1.2 million and in premium subscribers of 14%. Earlier in the year, as previously announced, we implemented a price increase for our new subscribers only, expanded into Canada and improved our marketing strategy. Because of the revenue deferral for subscriptions, we're now starting to see the payoff from these initiatives, including strong CPAs and marketing efficiencies, and we expect this trend to continue into Q4 and 2025.

Our focus continues to be on investing in growth while maintaining profitability. Now I'd like to speak about Travelzoo META. We are working on the production of the first metaverse travel experiences, [indiscernible] will be browser enabled. As stated in previous earnings calls, we are conscious of developing Travelzoo META in a financially disciplined way. We will provide additional updates in due time.

I'm now handing over to the operator for questions for Holger, Jeff and me.

[Operator]

[Operator Instructions] We will take our first question from Theodore O'Neill with Litchfield Hills Research.

[Theodore O'Neill, analyst]

I have 2 questions for you. First 1 for Holger. Last quarter, you talked about travelers becoming more cost conscious and price increases for flights and rooms would moderate. Is that still what you're seeing out there? Are you seeing any more or less of that? And my second question is on the operating margin between North America and Europe, I would have expected the European margin to have been lower should just be relative economic growth there. I would expect the North American to be about where it is, but I was just a little surprised about the strength in Europe, and I was wondering if you could give us some details on that.

[Holger Bartel, executive]

So on your first question, yes, we are hearing from hotels and airlines that they are seeing generally less demand better prices, more deals. You might have seen the big brands like Marriott, InterContinental, launching big sales on their hotels for sure. So that trend continues or even accelerate. And yes, consumers are looking for value. We also see that they are looking for less crowded destinations on one hand because they want to go to places that are not overcrowded, and on the other hand, places that are less popular or destinations that offer generally better value, and that's where we are actually strong by motivating our members to go to places where they haven't been or that they didn't think about or there [indiscernible] no existed.

And on the second question, yes, we're happy about Europe. Profit margin there is increasing and getting closer to the one-off North America. We just operated very well efficiently in Europe this quarter, and we expect this trend to continue.

[Operator]

We'll take our next question from Michael Kupinski with NOBLE Capital Markets.

[Michael Kupinski, analyst]

Just a couple of quick questions here regarding the membership. Can you give us an idea of what you're anticipating in terms of in 2025 the mix might be between advertising and membership fees, particularly as you roll out your membership fees. And then in terms of -- you indicated that Q4 should show some revenue growth. Are you seeing improving trends in Americas? And what are you seeing that in terms of Europe? And then are there any membership fees that are starting to filter into Q4 that might be accounted for any improving trends there? And then the final part of that is, in terms of the membership fee rollout, I know that you're testing various models and length in terms in pricing and so forth. I was just wondering, have you made any changes to your initial thoughts in terms of the membership fees going forward? And if so, what that might be.

[Technical Difficulty]

[Unknown Executive]

[indiscernible] repeated again, we get membership revenue to increase quite substantially next year. With regards to Q4, we see membership fee revenue increasing more in 2025, just because the existing members are still exempt. And you also asked about, what was the next question again about membership fees in Q4.

[Michael Kupinski, analyst]

Yes. If you're starting with increase.

[Holger Bartel, executive]

[indiscernible] Q3, U.S. was really the only market and revenues were down against our expectations. So it wasn't a big deal for us. We just had some advertisers move their spend into the future. And then we had one who was supposed to launch in Q3, their website wasn't ready in Q4. So in Q4, we expect things to normalize. But as I said, no, we don't expect yet a substantial growth in membership in Q4 just because of the strategy that we have pursued that we are giving the existing members an exemption in 2024.

[Michael Kupinski, analyst]

And Holder, I missed the first part of my question, it was a little jumbled. And I think that was related to the revenue mix between advertising and membership fees in 2025. Could you just repeat that for me?

[Holger Bartel, executive]

I said we don't make any forecast yet with regards to how many members, how many paid members what we expect in 2025. So we also don't make any forecast yet for how much membership revenue we expect to generate in that year.

[Operator]

And we will take our next question from Steve Silver with Argus Research.

[Steven Silver, analyst]

Holger, in the management focus slide, you talked about adding new benefits to the paid membership. Just curious if there's any updated thinking in terms of what that might entail even just in terms of potentially bundling the paid membership and Travelzoo META memberships down the line once the META is ready for a broad rollout.

I'm curious to whether -- what some of those details might be about the paid membership benefits. And then as a follow-up would be, given the strong cash flows that the company has announced, especially in really, what are the uses of cash that you're thinking about moving forward, whether it's just the continued share repurchases and then marketing expenses for customer acquisition on the paid membership side.

[Holger Bartel, executive]

So Steve, on the member benefits, we have 4 in the works right now, and our members since [indiscernible] are also remember where we are about them in the next few weeks. They mostly have to do with traveling better because we want -- if you are a traveler to member and you travel a lot because you're travel enthusiast, we would like you to just have a better travel experience. You will hear more about that with regards to the cash flow. We saw we just announced another share repurchase program. So we will continue to repurchase shares because we feel it's a good investment right now. The stock price is still attractive [indiscernible] in 2025 when we expect even higher cash flows, we believe we can invest more in marketing and growing the member base in addition to also improving earnings per share.

[Operator]

And we will take our next question from Ed Woo with Ascendant Capital.

[Edward Woo, analyst]

Congratulations on the growth Jack's Flight Club had pretty good year-over-year growth. Is it in all markets now? I know you said that you [indiscernible]. And what do you think the long term do you think at like [indiscernible] encompassed a majority of Travelzoo members?

[Christina Ciocca, executive]

Sure, I can answer that. So for right now, we're in the U.K., Canada, the U.S. and certain countries throughout Europe. We are looking into other countries, particularly in Europe, where we can expand. We're also considering whether we launch with alternative language additions beyond just English. So that's in our consideration set as we start our strategic planning for 2025. And then in terms of conversion of Travelzoo remember, that was always an attention when we acquired this business, we have seen that Chalomembers have interest in Jack's Flight Club. Now that Travelzoo has become [indiscernible] membership, we are reconsidering what that will look like and ways in which we can kind of offer both services to Travelzoo members. So that [indiscernible] GDP but is in progress in terms of discussions?

[Michael Kupinski, analyst]

What is the membership fee for Jack's Flight Club in the U.S. versus in Europe? Are they pretty comparable? .

[Christina Ciocca, executive]

Yes, it's comparable. It's $60 in the U.S. and in Europe, what depends -- depending on the currency, but basically comparable for conversion.

[Operator]

And we'll take our next question from Patrick Sholl with Barrington Research.

[Patrick Sholl, analyst]

I just had a follow-up question on -- you talked about on ensuring that people that travel with Travelzoo a lot have a better travel experience. I'm just kind of wondering with the shift to the subscription-oriented service. If there's any areas that you felt needed additional investment on either customer service or sort of like your deal research or anything in those areas. So I had a couple of other follow-ups.

[Holger Bartel, executive]

Over the last couple of weeks, I had the pleasure of participating in many meetings with our existing members. We organized [indiscernible] lunches in the U.K. and the U.S. and Canada. And it provides a good opportunity to learn even more from our members. And we are very excited about 2025. They are also because the most important thing that our members are getting from Travelzoo are the special prices on the exclusive experience that we negotiate for them. When we explain to them why a membership fee, which makes Travelzoo what you call a closed user group, while this enables us to deliver even better offers to our members, then they really understand why we are going in this direction. They like it because ultimately, the membership fee, which it's a pretty nominal amount, $40 in the U.S., GBP 30 in the U.K. It's relatively insignificant to the hundreds or sometimes thousands of dollars that you can see with the Travelzoo deal. So once they understand it and see that it allows us to scale things like price parity for hotels and so forth and bring them more and better offers they get very excited. And that's why we feel very positive about this move, and we feel very good about 2025. Now Pat, you said you had a couple of more questions.

[Patrick Sholl, analyst]

Yes. So I mean, maybe it's just sort of asking something that Mike had another way, but with your advertisers, I guess, what are their sort of their expectations on the reach of your membership base with -- when you transition to the legacy numbers on to the paid product.

[Holger Bartel, executive]

So we decided that for our advertisers, we will maintain their reach in 2025. Even if you don't convert to a member to a paying member in 2025 and you have been a travel to member for a long time, just still able to see the offers, we're still able to see top trends. You will see a bit later than the others, and there's lots of other benefits that you are missing out on. You cannot buy the offers that we negotiate exclusively. But for our advertisers, we have come up with a plan that maintains the reach for them. And so with this strategy, we also anticipate to maintain or even grow our advertising revenues next year. And lastly, think of a member who is paying a membership fee, that member is now even more looking forward to the offers that we are receiving. They are more engaged to pay for something that previously was free. So now you really want to take advantage, and we see that members already in 2024, who pay a membership fee because they join in 2024 that they are more active and more engaged than those that haven't paid a membership fee previously. .

[Operator]

And this does conclude the Q&A portion for today's call. I would like to turn the call back over to Mr. Holger Bartel for closing remarks.

[Holger Bartel, executive]

Yes, dear investors, thank you so much again for your time and support, and we look forward to speaking with you again next quarter. Have a great day.

[Operator]

This concludes today's Travelzoo Third Quarter 2024 Earnings Call and Webcast. You may disconnect your lines at this time, and have a wonderful day.